Three Odd Comments
Vancouver House Prices:
It was reported on Monday that Vancouver residential real estate is among the least affordable among the major cities of the world. The reason is obvious to any one who has the least familiarity with the city. While the number of properties, particularly in higher price range, being purchased by absentee citizens of Asian origin is not insignificant and helps to raise the prices, the main reason is the size of drug trade. The unreported income from local and international drug traffic impacts on calculated affordability in two ways: it is not included in the income in statistics making the affordability factor lower than it really is and much of drug trade income is invested in housing pushing its price up. It is a similar situation to many Italians owning luxury cars and residences while reporting paltry incomes to avoid the taxes. It makes the life of honest Vancouverites harder but one may consider it a just punishment for tolerating, even supporting, the drug trade.
Banks and Risky Ventures:
Mark Carney, Governor of Bank of Canada, has expressed reservation on several occasions about the proposed law south of the border restricting the banks from indulging in risky trades. It is this kind of activity that caused the banking to freeze in 2008 globally and cost hundreds of billions of dollars to activate it again. Mr. Carney argues that banks are needed to trade government bonds because there is no other agency to ‘make the market’ in government bonds particularly when the risks are high and without it the cost of borrowing by the governments will rise. The argument is simplistic and its three components have easy answers. First, the main reason for restricting banks from such activity is that their actions have impact on all aspects of our lives and no one can afford for them to fail by indulging in risky ventures which sometimes turn sour. Second, if the banks are forbidden to do it, the slack will be picked up by large investment funds who would not freeze all business activity if they failed and would not need to be bailed out. Third and most important, if the governments have to pay a premium to prevent the repeat of 2008 crisis, it is not a great burden considering the value of the insurance. Surely, the Governor of the Bank of Canada realizes that the problems in Europe have been exacerbated by the large holdings of risky bonds acquired by the European banks, no doubt, because of their higher yields, without thoroughly evaluating the ability of the governments to repay them. If banks were restricted by law to stay away from risky ventures, governments of Greece and other troubled countries would have been forced to mend their finances when it could have been done instead of borrowing money to bribe the electorate and delaying the outcome till it may be too late.
Why Second Marriages Succeed?
The second marriage of two people who had messy divorces is often happier than most lasting marriages at their later stage. I am not a psychologist and I am known for not having any Emotional Intelligence. Therefore, I should not be expressing an opinion on the issue but I can’t resist being an undisciplined person that I am. After years of demanding jobs and daily chore of bringing up the kids, each partner has a memory bank of events during their time together. Human nature being what it is, pleasant memories are pushed to the back; at least the contribution of the partner to make them pleasant does. On the other hand, the role of the partner in unhappy recollections is at the front of the stage and each time there is a disagreement the movie of them all is replayed in the mind multiplying the grief caused by the event itself and drowning all other pleasantness in life. For a new couple with not much history behind them an unpleasant episode is just one bother. There is no load of accumulated misery of past years to bring forth and it is forgotten as soon as something good happens as it most often does.
Friday, January 27, 2012
Friday, January 20, 2012
Keystone Rejection: A Blessing in Disguise
President Obama announced the rejection of the application of TransCanada Corporation to build a pipeline to carry bitumen from Alberta to Texas. This was expected by many observers and the reasons, whether political or environmental considerations, are immaterial. The rejection has upset our political leaders and has caused a big brouhaha in our media. The push is on to find alternate markets for the oil, regardless of legal or environmental considerations.
In spite of such kneejerk reaction some cool thinking might show that this decision may actually be a blessing in disguise. By exporting the bitumen to the U.S. in its crudest form we are also exporting the jobs and profits in the processes of refining it into more usable products. The only reason for exporting the crude is that it suits the infrastructure of oil companies who extract the bitumen from oil sands. It is understandable that major international companies want to use the excess capacity on the Gulf coast for refining the crude rather than build new facilities in Canada for this purpose. But why should our governments be so willing to go along with them is an issue that needs to be explained to Canadians, particularly those looking for employment in well-paying jobs.
Refineries in Central and Eastern Canada import approximately 800,000 barrels of oil from overseas while we export around 2.000,000 barrels from the West to our southern neighbour. Whether it is history or the economics of several decades ago, the governments of the day were complicit in the implementation of short-sighted policies that caused us to import so much oil rather than use some of our own production. The rejection of the pipeline with coincidentally the same capacity as the volume of imports offers an opportunity to remedy the situation. While we need to explore ways to broaden the scope of market for excess production, our governments in Edmonton and Ottawa should implement policies which encourage the use of Canadian production for our refined petroleum needs and the phasing out of imports. If this were accomplished, not only would our security of supply be enhanced, we would be beholden to a lesser extent to the politics in Washington now or in Beijing or Delhi at sometime in the future. If this point is driven home and we adjust the trading pattern of crude oil accordingly, all Canadians will be better off in the not so long run.
Yet another issue to consider is the possibility of at least some of crude oil consumption being replaced by natural gas. Vast resources of natural gas have been discovered over the last decade in North America and elsewhere and prices have dropped to astounding three dollars or even less per thousand cubic feet while crude oil has stayed in the range of $100 per barrel. In addition, the clean coal technology is making rapid advances and emission free coal powered electricity generation in near future is a distinct possibility. It is only a matter of time when electricity will be more affordable because most of it would be generated by cheap coal and natural gas. This will promote the use of cars and trucks powered by electricity or natural gas and the demand for oil will decline. Add to this the reserves of recoverable shale oil being discovered in the U.S., South America and the Middle East, the future price of crude oil starts to look less rosy. It can be argued that the falling demand in the West will be offset by increasing consumption in Asia. However, Asian countries have simmering political and social problems and projections of recent growths into the future are likely to prove dangerous.
In this scenario of declining demand and falling prices, do we want to continue building new oil sand plants at huge environmental and economic costs? Should we not be planning for the changes we see on the horizon? It is time we took off our rosy glasses and looked at all possibilities rather than wait till it is too late.
President Obama announced the rejection of the application of TransCanada Corporation to build a pipeline to carry bitumen from Alberta to Texas. This was expected by many observers and the reasons, whether political or environmental considerations, are immaterial. The rejection has upset our political leaders and has caused a big brouhaha in our media. The push is on to find alternate markets for the oil, regardless of legal or environmental considerations.
In spite of such kneejerk reaction some cool thinking might show that this decision may actually be a blessing in disguise. By exporting the bitumen to the U.S. in its crudest form we are also exporting the jobs and profits in the processes of refining it into more usable products. The only reason for exporting the crude is that it suits the infrastructure of oil companies who extract the bitumen from oil sands. It is understandable that major international companies want to use the excess capacity on the Gulf coast for refining the crude rather than build new facilities in Canada for this purpose. But why should our governments be so willing to go along with them is an issue that needs to be explained to Canadians, particularly those looking for employment in well-paying jobs.
Refineries in Central and Eastern Canada import approximately 800,000 barrels of oil from overseas while we export around 2.000,000 barrels from the West to our southern neighbour. Whether it is history or the economics of several decades ago, the governments of the day were complicit in the implementation of short-sighted policies that caused us to import so much oil rather than use some of our own production. The rejection of the pipeline with coincidentally the same capacity as the volume of imports offers an opportunity to remedy the situation. While we need to explore ways to broaden the scope of market for excess production, our governments in Edmonton and Ottawa should implement policies which encourage the use of Canadian production for our refined petroleum needs and the phasing out of imports. If this were accomplished, not only would our security of supply be enhanced, we would be beholden to a lesser extent to the politics in Washington now or in Beijing or Delhi at sometime in the future. If this point is driven home and we adjust the trading pattern of crude oil accordingly, all Canadians will be better off in the not so long run.
Yet another issue to consider is the possibility of at least some of crude oil consumption being replaced by natural gas. Vast resources of natural gas have been discovered over the last decade in North America and elsewhere and prices have dropped to astounding three dollars or even less per thousand cubic feet while crude oil has stayed in the range of $100 per barrel. In addition, the clean coal technology is making rapid advances and emission free coal powered electricity generation in near future is a distinct possibility. It is only a matter of time when electricity will be more affordable because most of it would be generated by cheap coal and natural gas. This will promote the use of cars and trucks powered by electricity or natural gas and the demand for oil will decline. Add to this the reserves of recoverable shale oil being discovered in the U.S., South America and the Middle East, the future price of crude oil starts to look less rosy. It can be argued that the falling demand in the West will be offset by increasing consumption in Asia. However, Asian countries have simmering political and social problems and projections of recent growths into the future are likely to prove dangerous.
In this scenario of declining demand and falling prices, do we want to continue building new oil sand plants at huge environmental and economic costs? Should we not be planning for the changes we see on the horizon? It is time we took off our rosy glasses and looked at all possibilities rather than wait till it is too late.
Sunday, January 15, 2012
An Arrogant Post
For some reason I can only guess at, Canadians are more interested in Republican primaries in the U.S. than they are in the leadership races of two Federal opposition parties. Surely, the actions of government in Ottawa have more impact on average Canadians than the President of the neighbouring country, let alone who opposes him in the next election. Could it be because most Canadians watch American TV channels and read American magazines rather than the local offering? Around the cooler or in the coffee shop we share the stories on American media and are generally ignorant of happenings around us.
I have lived in Canada for 38 years and I love this country. Disregarding some instances of colour preference, Canada has been good to my family and we have been made quite comfortable. In return, we have done what we could to help the country’s economy and artistic endeavours. Canadians are reputed as a tolerant people and they forgive misdemeanours of foreigners readily. They are proud of their country and for very good reasons. Yet, I have a suspicion that we have a little of the mentality of the populations ruled by foreigners for long periods - Others know more than us and it behooves us to follow what they do without much thought. This subconscious feeling leads us to foreign products, stores, TV stations and magazines in preference to our own and in celebrating foreign royalty. That in turn perpetuates our sense of inferiority we inherited from our great grandparents who were forced out of their homelands by somewhat desperate circumstances there and the promise of a better future in a far-off frozen Tundra. They survived somehow, worked hard in difficult environment and prepared the ground for the prosperity of future generations. We owe them much gratitude and it would be preposterous to blame them for the psychological complexes of current generation. But we can face the truth without assigning any blame to ancestors long gone to heaven. Along with the wealth they generated, we also inherited from our forbears the attitude that the people in mother countries were our betters and we can do worse than imitate their social, political and economic order.
It is quite possible that I am transposing my Indian inferiority complex on the kind people who have been more than fair to me. If this is indeed true I apologize for hurt feelings. On the other hand, if it provokes some discussion, something useful may come out of this arrogant post.
For some reason I can only guess at, Canadians are more interested in Republican primaries in the U.S. than they are in the leadership races of two Federal opposition parties. Surely, the actions of government in Ottawa have more impact on average Canadians than the President of the neighbouring country, let alone who opposes him in the next election. Could it be because most Canadians watch American TV channels and read American magazines rather than the local offering? Around the cooler or in the coffee shop we share the stories on American media and are generally ignorant of happenings around us.
I have lived in Canada for 38 years and I love this country. Disregarding some instances of colour preference, Canada has been good to my family and we have been made quite comfortable. In return, we have done what we could to help the country’s economy and artistic endeavours. Canadians are reputed as a tolerant people and they forgive misdemeanours of foreigners readily. They are proud of their country and for very good reasons. Yet, I have a suspicion that we have a little of the mentality of the populations ruled by foreigners for long periods - Others know more than us and it behooves us to follow what they do without much thought. This subconscious feeling leads us to foreign products, stores, TV stations and magazines in preference to our own and in celebrating foreign royalty. That in turn perpetuates our sense of inferiority we inherited from our great grandparents who were forced out of their homelands by somewhat desperate circumstances there and the promise of a better future in a far-off frozen Tundra. They survived somehow, worked hard in difficult environment and prepared the ground for the prosperity of future generations. We owe them much gratitude and it would be preposterous to blame them for the psychological complexes of current generation. But we can face the truth without assigning any blame to ancestors long gone to heaven. Along with the wealth they generated, we also inherited from our forbears the attitude that the people in mother countries were our betters and we can do worse than imitate their social, political and economic order.
It is quite possible that I am transposing my Indian inferiority complex on the kind people who have been more than fair to me. If this is indeed true I apologize for hurt feelings. On the other hand, if it provokes some discussion, something useful may come out of this arrogant post.
Friday, January 6, 2012
Investing Philosophy for the New Year:
While the New Year will bring prosperity, health and happiness to some, almost as many will suffer from impoverishment, ailments and grief of loss of the dear ones. There will be moments of joy and periods of sorrow in every life. It is impossible to predict what the climate change, terrorism or political upheaval will dump on us and where. These are uncertain times but that is how every year has been and 2012 will be no different.
The issue in the minds of all investors is simple to state: How to handle our investments in the stock market under different scenarios we are likely to face? Extreme downside is not a consideration because if the world comes to an end what happens to our money doesn’t matter. We invest in a system which is moving forward whether stumbling or running at full tilt. Investment in commodities and real estate has undue risks because there trading tends to be quite irrational and prone to hype. Yes, the stock market too is not rational but only on a day to day basis. Over the term of a few months one can see the patterns and relate them to reality. This has worked in the past and should work in the New Year too.
The indices for the U.S. and Canadian exchanges rose sharply in the first quarter of 2011 to give up these gains and some more in the third quarter. In the fourth quarter they fluctuated in a 1000 point range, centered at 12,000 for TSX. Many acute hedge fund managers made money by shorting when the index was 12,500 and covering the shorts at 11,500. This trading by large funds may have played a part in the volatility. The U.S. economy, shaky banks, the problems of Euro and heavily indebted European economies were perhaps the reasons for drop from the peaks of the second quarter but their ups and downs did not correspond to the volatility in the last few months and may have had little to do with it. I suggest that the market will trade in the same vein for next few months. This pattern will change downwards if there is a catastrophe like a repeat of 911 in the West, political upheaval in China or India, major confrontation in the Middle East or unforeseen significant weakening in a major Western economy. Conversely, there will be an upward move if Europe resolves its problems convincingly (not likely in the short term) or the U.S. economy shows signs of life (possible if President Obama stands up to Tea Party Republicans and taxes are raised to reduce the budget deficit) or India and China reverse recent declines and commodity markets begin to rise again. Isolated natural havocs like Tsunami in Japan don’t seem to have a lasting impact on the economy except on the communities of the region. What a series of such disasters in quick succession will do is too awesome to contemplate and plan for. That said, an investor who watches for and reacts to the signs around him will reap profits whichever way the economy moves.
Rather than balance the portfolio for different sectors of economy or for geography, it is better to balance it on the basis of yield, risk and the prospects of individual companies. Even a seven figure account can own only one or two companies in any sector. For example, which bank or insurance company to hold to represent the financials is a key issue and needs the attention of the investor. Generally, it is better to invest in second tier companies than the largest in their industries for two reasons. First, second tier companies are often bought at a premium by their peers or by the leaders in the industry. Second, these companies are usually not on the radar of hedge funds and are not as volatile as the top tier companies. It is often profitable to put a small percentage of the portfolio in companies which have either hit the rough spot and have a good prospect of recovering or the start ups which have an unusual and proven (as much as anything can be proven in this business) potential. In my experience, many of the big losers of last year are likely to be big winners this year. It helps to sleep better if an investor remembers that over the short term, performance of the portfolio is critical, not that of each individual component, because these may fluctuate in a large range for no good reason and trading based on daily price alone causes grief more often than joy.
There are many tomes, media columns and blogs advising investors but there is no proven technique. Generally, buy and hold is better than day trading even when trading expenses are negligible. On the other hand, there is a time to buy a stock and there is a time to sell. Long term investors develop an instinct which guides them on when to trade which works for them more often than against them. Not every investment in 2012 will work even for the sage of Omaha. However, more of them should succeed than fail for a good investor and the portfolio should be ahead at the end of the year after counting for inflation and taxes. Any gain on top of that is gravy.
Throwing stones while living in a glass house:
Picking junk may have made Smiling Barracuda rich, as Mr. Delaney claims (Smiling Barracuda, Globe and Mail, Dec. 17), it has not done much for his his investors. Stock of Sherritt was $8 in 1996; This week, fifteen years later, it trade around $6.00.
Another company loved by the media is Westjet. In five years its stock is down from over fifteen dollars to around eleven. Yet, watching the CEO being interviewed you would think that it has made its investors fabulously rich. Running down your competitors sounds better when you have something worth shouting about.
While the New Year will bring prosperity, health and happiness to some, almost as many will suffer from impoverishment, ailments and grief of loss of the dear ones. There will be moments of joy and periods of sorrow in every life. It is impossible to predict what the climate change, terrorism or political upheaval will dump on us and where. These are uncertain times but that is how every year has been and 2012 will be no different.
The issue in the minds of all investors is simple to state: How to handle our investments in the stock market under different scenarios we are likely to face? Extreme downside is not a consideration because if the world comes to an end what happens to our money doesn’t matter. We invest in a system which is moving forward whether stumbling or running at full tilt. Investment in commodities and real estate has undue risks because there trading tends to be quite irrational and prone to hype. Yes, the stock market too is not rational but only on a day to day basis. Over the term of a few months one can see the patterns and relate them to reality. This has worked in the past and should work in the New Year too.
The indices for the U.S. and Canadian exchanges rose sharply in the first quarter of 2011 to give up these gains and some more in the third quarter. In the fourth quarter they fluctuated in a 1000 point range, centered at 12,000 for TSX. Many acute hedge fund managers made money by shorting when the index was 12,500 and covering the shorts at 11,500. This trading by large funds may have played a part in the volatility. The U.S. economy, shaky banks, the problems of Euro and heavily indebted European economies were perhaps the reasons for drop from the peaks of the second quarter but their ups and downs did not correspond to the volatility in the last few months and may have had little to do with it. I suggest that the market will trade in the same vein for next few months. This pattern will change downwards if there is a catastrophe like a repeat of 911 in the West, political upheaval in China or India, major confrontation in the Middle East or unforeseen significant weakening in a major Western economy. Conversely, there will be an upward move if Europe resolves its problems convincingly (not likely in the short term) or the U.S. economy shows signs of life (possible if President Obama stands up to Tea Party Republicans and taxes are raised to reduce the budget deficit) or India and China reverse recent declines and commodity markets begin to rise again. Isolated natural havocs like Tsunami in Japan don’t seem to have a lasting impact on the economy except on the communities of the region. What a series of such disasters in quick succession will do is too awesome to contemplate and plan for. That said, an investor who watches for and reacts to the signs around him will reap profits whichever way the economy moves.
Rather than balance the portfolio for different sectors of economy or for geography, it is better to balance it on the basis of yield, risk and the prospects of individual companies. Even a seven figure account can own only one or two companies in any sector. For example, which bank or insurance company to hold to represent the financials is a key issue and needs the attention of the investor. Generally, it is better to invest in second tier companies than the largest in their industries for two reasons. First, second tier companies are often bought at a premium by their peers or by the leaders in the industry. Second, these companies are usually not on the radar of hedge funds and are not as volatile as the top tier companies. It is often profitable to put a small percentage of the portfolio in companies which have either hit the rough spot and have a good prospect of recovering or the start ups which have an unusual and proven (as much as anything can be proven in this business) potential. In my experience, many of the big losers of last year are likely to be big winners this year. It helps to sleep better if an investor remembers that over the short term, performance of the portfolio is critical, not that of each individual component, because these may fluctuate in a large range for no good reason and trading based on daily price alone causes grief more often than joy.
There are many tomes, media columns and blogs advising investors but there is no proven technique. Generally, buy and hold is better than day trading even when trading expenses are negligible. On the other hand, there is a time to buy a stock and there is a time to sell. Long term investors develop an instinct which guides them on when to trade which works for them more often than against them. Not every investment in 2012 will work even for the sage of Omaha. However, more of them should succeed than fail for a good investor and the portfolio should be ahead at the end of the year after counting for inflation and taxes. Any gain on top of that is gravy.
Throwing stones while living in a glass house:
Picking junk may have made Smiling Barracuda rich, as Mr. Delaney claims (Smiling Barracuda, Globe and Mail, Dec. 17), it has not done much for his his investors. Stock of Sherritt was $8 in 1996; This week, fifteen years later, it trade around $6.00.
Another company loved by the media is Westjet. In five years its stock is down from over fifteen dollars to around eleven. Yet, watching the CEO being interviewed you would think that it has made its investors fabulously rich. Running down your competitors sounds better when you have something worth shouting about.
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